Axis Bank's first-quarter 2016 earnings grew 19% over prior year, in line with our 18% five-year annual growth forecast. While the market’s primary concern has been asset quality, it was another uneventful quarter for the narrow-moat bank which performed in line with our estimates, and its past performance. Provisions as a percentage of average loans were modestly above our 1% forecast, however, management guided for an 80 to 90 basis points credit cost for the full year which we believe is achievable. Our fair value estimate of INR 531 and narrow moat rating remain unchanged.
Net interest margins are on track at 3.8% for the quarter and management guidance of 3.5% or more for 2016, in line with our 3.6% estimate. Retail advances (up 26%) lead overall loan growth of 23%; and now form 40% of advances. We are happy to see this segment grow as 39% of fee income and 26% of other income generated at Axis comes from its retail clients.
For other income (up 22%), the main driver was trading profits (28% of other income) as the firm continues to benefit from a falling interest rate environment on its investments, and fee from treasury and debt markets (another 10% of other income) as the Indian capital markets continue to remain buoyant.
Operating expenses were up 7%, primarily reflecting salary increases of 8% as the bank did not open any new branches this quarter but will continue to do so through the remainder of the year. Cost-to-income guidance for the standalone bank is less than 40%, while our consolidated forecast is 42%. While Axis confirmed its intent to continue launching 200 new branches every year, 47% of its transactions now happen digitally (outside a branch or ATM) as digital transactions grew by 24% over the prior year, while branch and ATMs were down 1% and 5% respectively. The private bank, like several of its peers, realizes the importance of digital technology to clients and is spending adequately in building its capabilities, in our opinion, while continuing to keep overall costs in check.